A. A vacant lot acquired for $150,000 is sold for $290,000 in cash. What is the effect on the sale on the total amount of the seller's (1) assets, (2) liabilities, and (3) stockholders' equity (retained earnings)?

b. Assume the seller owes $80,000 on a loan for the land. After receiving the $290,000 cash in (a), the seller pays the $80,000 owed. What is the effect on the payment on the total amount of the seller's (1) assets, (2) liabilities, and (3) stockholders' equity (retained earnings)?

Accounting Equation is expressed as:

a. Assets = Liabilities + Equity

When property or land is sold for cash, following journal entry is recorded:

Cash A/c                                                 Dr. 290,000

    To Land                                                                   150,000

    To Gain on sale on sale of land                             140,000

(Being sale of land for cash recorded)

The effect of the above transaction would be:

Assets would increase by net amount i.e $290,000 - 150,000 i.e by $140,000.

No effect on the liabilities

Retained earnings would increase by $140,000

b. When loan is discharged,

    Loan A/C                                               Dr. 80,000

         To Cash                                                                80,000

   (being discharge of loan recorded)

Following would be the effect:

Assets would increase by net amount i.e $290,000 - 150,000- 80,000 i.e $60,000

Liabilities would reduce by $ 80,000

Retained earnings would increase by $140,000

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